

With Goldman Sachs’ announcement that it will act as the leading investor on its second social impact bond, the New York-based investment bank has signaled that it plans not only to remain closely involved in the market for financial products that fund public social programs—but also to help shape it.
“We think that, particularly given significant reductions in government resources, the idea of leveraging private capital to help address some of these very pressing problems is important work, and it’s something that we’re interested in continuing to be a thought leader in,” says Andrea Phillips, vice president of the bank’s Urban Investment Group, the division that made the investment. “Our hope and expectation is that as we do more of these, we can move more toward structures that are more replicable and more standardized.”
Goldman’s recent SIB investment will support a preschool program in Utah that focuses on improving school readiness among three- and four-year-olds. The expectation is that the program will help decrease the students’ need for special education during the next 13 years they’re in public school, which would mean major savings for the district and the state. By agreeing that its loan will be repaid in the event of a successful outcome and that it will not if the program fails, Goldman accepts that the risk of investing in the social program shifts from the government—and taxpayers—to the bank.
Goldman’s first SIB was also the U.S.’s first. Last August, New York City Mayor Michael Bloomberg announced that the firm would cover the costs of a program designed to reduce youth recidivism among young men incarcerated on Rikers Island. If rates of reoffending fall by 10 percent or more after four years, the recidivism program will be deemed a success, and the city’s Department of Corrections will repay Goldman’s loan. If the program doesn’t reach its recidivism-slashing goal, the government owes nothing, in keeping with the concept at the heart of the SIB structure.The bank’s investment in Utah was smaller than that in New York, where Goldman will loan $9.6 million over the course of four years to the recidivism-prevention program. In Utah, the firm will loan a total of up to $4.6 million to the United Way of Salt Lake, the nonprofit that will oversee the preschool program—the bank’s contribution will be between $800,000 and $1 million in the first year.
Children in the preschool program will be tested to determine which are most likely to need remedial services once they enter school; those students who send up a red flag will generate a pay-for-success payment in the amount of $2,470 (95 percent of the fixed $2,600 per annum per-student payment given to districts by the state for special education), plus a base interest rate of 5 percent, for each year they don’t require special services through sixth grade (pay-for-success payments will halt once students hit sixth grade). If the loan is repaid in full before the students reach sixth grade, Goldman’s investor payments will consist of 40 percent of the savings, or $1,040 per child per year of remedial education avoided—in other words, its return on the investment could be considerably more than the 5 percent interest rate if the program is very successful. After sixth grade, all savings flow directly to the district and state.
Goldman’s investment in the New York City deal included a 75 percent loan guarantee from the mayor’s private foundation, Bloomberg Philanthropies, leading some observers to wonder whether a SIB structure involving a mainstream investor would be replicable without such a significant attenuation of risk. In the Utah deal, venture capitalist J. B. Pritzker’s family foundation will help to defray Goldman’s risk, but not as significantly as Bloomberg did in New York; Pritzker will contribute a subordinate loan—not a loan guarantee—of up to $2.4 million. This brings the total private capital invested in the preschool program to $7 million, which will serve from 450 to 600 children in the preschool classes’ first year, and up to 1,000 by their third.
The SIB concept was piloted in the U.K., where a contract signed by the Ministry of Justice in March 2010 asked investors to bet on the success of a recidivism prevention program at a prison in the city of Peterborough. That pilot is ongoing, but initial figures indicate that investors and social service implementers alike are on the road to a successful outcome: the Ministry of Justice announced in June that there was a 6 percent drop in reoffending rates for ex-Peterborough prisoners since the pilot launched, and a 14 percent increase annually.
SIBs have found a friendlier home in the U.K., where 13 have been funded so far, than the U.S., where two have reached this threshold, for various reasons—the U.K.’s relatively more-centralized government, the strong advocacy of its high-level politicians, among other factors.And it looks like the U.K. is likely to remain interested in the structure: in advance of the G8 Summit in June, which it hosted, the U.K. government announced the creation of a Taskforce on Social Impact Investment, helmed by British businessman Sir Ronald Cohen, to discuss and eventually report on policy initiatives that could take social impact investments like SIBs into the mainstream.
For its part, Phillips says Goldman Sachs, too, plans to keep pushing for the creation of new SIBs.
“We’re actively in conversations with other folks, whether it’s state or local governments or nonprofits, around other investments that use this structure,” she says. “And we’ve been approached by other jurisdictions who are very interested in trying to replicate some of what we’ve put in place in Utah. We think that’s really exciting.”